Archive for the ‘Emerging Research’ Category

The most obvious, and most common, way to think about spending money is that this is an individual decision. Within this broad framework individuals receive pay for the work they have done and then decide how much money should be spent on housing, on clothes, and on discretionary items. Some people spend carefully. Some spend less carefully. And some spend in ways that guarantee financial problems for themselves.

This simple and compact world view has been the basis of many editorials about thrift and forms the philosphical underpinning for many of the questions I get when I occasionally do media interviews on the subject. And this particular narrative does contain some truth. No less than The Pope has repeatedly warned against the moral dangers of materialism. And while thrift and materialism are not perfect opposites, my life experience suggests that those who spend their leisure hours emersed in activities other than shopping or plotting how to acquire their next posession are far more likely to handle their money responsibly — to spend and save in ways that are in line with their long-term economic well-being. It doesn’t always work this way, but often it does.

But this view also has an important ommission that has practical implications for the way we think about spending decisions. Consumption, and particularly conspicuous consumption, takes on added social meaning when an individual feels powerless relative to others in society. A Hispanic woman, who speaks English with a Spanish accent, may believe that others who meet her for the first time will assume that she is poor and less educated. How might she compensate for this? She may choose to purchase a Louis Vuitton handbag or drive a BMW even if she cannot really afford to do so. Expensive luxury brands tell the world “I am not as powerless as you think I am” and they appeal to some segments of the population who can least afford to purchase them. Look in the mirror. Will people meeting you for the first time assume by your appearance and speech that you are likely to be reasonably successful at life? If the honest answer is “yes” it is easier for you to handle your money responsibly.

As we move forward with efforts to teach responsible spending and saving, to understand why some people are better at it than others, we need supplement the common moral narrative with the understanding that the psychological value of conspicuous consumption varies across individuals in accordance with their own self-perceptions of power and position. Lifting up those who feel powerless is more likely to change self-defeating spending behavior than recriminations that make them feel worse than they already do.

But the story of men, women and money is much more complicated than one blog post or short article. And I want to briefly address another piece of the puzzle today. Yes, women are better investors, but they are also “worse” spenders in sense that they are more likely to be spendthrifts than men. That is one conclusion of a recently published paper, “Tightwads and Spendthrifts”, but the kernel of this particular result has been known at a practical level to marketers for quite some time. Women are better at, and enjoy, shopping more than men because of an evolutionary propensity to remember where objects are located, or are hidden. This is particularly true in the case of food. In early societies men hunted, and developed skills (physical strength, spacial geometry) that helped them in their daily activities as hunters. Women gathered — food mostly. They are better at it today because their own and their offprings’ survival depended on this skill for thousands of years.

But much like men’s hunting instincts help make them inferior investors to women, women’s gathering instincts can wreck the budget as well. They are good at shopping and so they enjoy it. And enjoying shopping too much….well we all know where that leads.

So how does this knowledge lead to practical advice for household finance. Well, current research certainly suggests that for couples, in more cases than not, it would be better for men to handle the day-to-day budgets and then once money is set aside as savings for women to do the investing. The interesting part of this advice is that it runs counter to what I, and I suspect many of us, have observed is the case with married couples that we know (women set the budget, men invest the savings). These more traditional roles appear to be at odds with healthy household finances.